Dollar extends weekly decline

Interest-rate differentials move against greenback

By

DeborahLevine

WilliamL. Watts

NEW YORK (MarketWatch) — The dollar declined against the euro and yen on Friday, adding to the week’s losses as bond yields moved away from favoring the U.S., making dollar-denominated bonds less attractive to foreign investors.

The euro trimmed gains as Spanish and Italian bond yields continued to edge higher. The euro
EURUSD, -0.5086%
rose to $1.3265, from $1.3170 in North American trading Thursday. Against the Japanese yen, the euro
EURJPY, +0.62%
rose to 109.40 yen, up from ¥108.74.

The ICE dollar index
DXY, +0.47%
which measures the greenback’s performance against a basket of six major currencies, declined to 79.344 from 79.745 late Thursday.

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Major currency pairs have swayed back and forth in a relatively tight range in the last week, with more attention being paid to the change in interest-rate spreads between countries.

For the week, the dollar index has lost 0.6%. For the year, it’s off 1%.

The euro is up 0.7% against the dollar and down 0.5% versus the yen from last Friday.

Up until the credit crisis, interest-rate differentials were one of the major drivers of currency trading, based on moves by investors across borders in search of higher yields.

“The U.S. yield scare has receded,” said Greg Anderson, senior foreign-exchange strategist at Citigroup. A smaller gain in yields makes it less attractive to exchange euros for dollars to buy Treasurys.

In the last few years, the dollar has been more closely correlated to U.S. stocks, moving inversely as investors shifted between the safe-haven status of the greenback and riskier assets like equities.

Since last week, stocks have declined slightly, which is being interpreted as a cheaper place to buy risky assets since volatility has remained manageable, Anderson said.

“Story number two remains the constructive environment for risky assets,” he said. “There’s still some downward push to the dollar when we see favorable conditions for putting on carry trades” in which a trader borrows in a cheaper currency to fund a higher-yielding asset.

At the moment, traders are funding carry trades with a combination of euro, yen and dollars, Anderson said.

Italian, Spanish bonds

Limiting the euro’s gains on Friday, Italian and Spanish bonds continued to feel pressure, sending yields higher. Italy’s 10-year yield (10YR_ITA) rose as high as 5.15%, while Spain’s 10-year yield (10YR_ESP) rose as high as 5.53%.

Strategists said the euro’s ability to hold gains despite the resurgence in peripheral yields underscored a shift in market relationships between risk appetite and currency moves during March.

“We could still be heading for the end of a week during which [euro/dollar] ends the week higher, with the euro only outpaced by the Swiss franc and yen since the Friday close,” said Simon Smith, chief economist at FxPro in London.

Still, the euro is likely to stay in the $1.30 to $1.35 range it’s been in for two months until more important economic data come out in two weeks, Anderson said.

Also Friday, the British pound
GBPUSD, -0.0954%
changed hands at $1.5874, up from $1.5810.

Against the yen, the dollar
USDJPY, +1.16%
slipped to ¥82.46, off its lows of the day and compared with ¥82.51 on Thursday.

Treasury yields fell on Friday while Japanese debt was nearly unchanged on the day, also lowering the yield advantage of U.S. debt, thus reducing demand for dollars.

For the week, the greenback has lost 1% against the yen, its first weekly decline in seven weeks. It’s still up 7.2% this year.

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